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Wages, risk sharing and economic fluctuations

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Enisse Kharroubi

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Abstract

This paper documents a stylized fact on the aggregate wage structure of firms and proposes an explanation for this stylized fact based on the existence of capital market imperfections. We first provide empirical evidence that, every thing else equal, workers real compensation is more sensitive to economic fluctuations in economies where the variance of fluctuations is larger. Secondly we show that this can be accounted for in a framework where firms are confronted to imperfect capital markets. In this case, the wage insurance provided to workers can have a negative effect on the borrowing capacity of firms. Then with risk averse workers, a trade-off appears for firms between the cost of labor and the intensity of borrowing constraints. Finally in a macroeconomic model where the risk sharing agreement between firms and workers directly impacts the macroeconomic behavior of the economy, this model yields the observed positive correlation between real wages procyclicity and the volatility of economic fluctuations.

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Paper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 2004-33.

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Date of creation: 2004
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Handle: RePEc:del:abcdef:2004-33

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